Expansion of Part of the Advance Tax Exemption System

apply to a single product and result in substitution drawbacks and excessive duty drawback. These problems will continue as long as raw materials imported for the purpose of manufacturing export goods are duty-free.

With increasing FTAs, it would be best to partially apply the advance duty exemption system rather than simply maintain current duty drawback practices, especially if Korea wishes to avoid trade conflicts involving subsidy issues. However, it would not be feasible to broadly apply the advance duty exemption system because the checking process to ascertain whether raw materials were actually used in the manufacture of export goods is still required

Measures for Improving the Duty Drawback System

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under the advance tax exemption scheme. Therefore, the advance duty exemption system should only be applied to cases of a single item with multiple duty rates, wide differences in rates, and a high drawback amount. In other words, this study recommends a limited application of the advance duty exemption system.

Administrative costs are unavoidably in duty drawback systems, including the advance duty exemption system. After all, the only system that satisfies low administrative costs for both exporters and tax authorities is the importation of raw materials for free under FTAs.

Conclusion

This study suggests ways to improve the duty drawback system of Korea in line with recent changes in economic environment, particularly the expansion of Korea’s FTA networks. Unlike existing studies, this study uses actual duty drawback statistics from 2001 to 2013 to analyze the impact of different duty drawback schemes over the past decade by business category, industry, and drawback scheme.

The results of analyses on the impact of the duty drawbacks in each industry show that in most industries drawbacks has the effect of promoting exports. In particular, the results of analyzing the elasticity of the amount of drawbacks show that it is considerably lower for petroleum goods than for other products, and the drawback-to-export ratio for petroleum goods is relatively higher than in the case of other industries. Given these circumstances and that petroleum products are made from imported crude oil, it would be more reasonable to apply the advance duty exemption system to that industry rather than to make improvements to the current duty drawback system to reduce inefficiency. In this context, this study recommends the possible application of the bonded area system (a type of the advance duty exemption systems) for the petroleum industry.

When it comes to the simplified fixed-rate duty drawback scheme, it is better applied to SMEs that incur a small refund amount. If the scope of applying the simplified fixed-rate duty drawback scheme is expanded, excessive refunds could be seen as subsidies and subsequently cause trade conflicts. Since each country has systems aimed at giving advantages to SMEs, it would be

Conclusion

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important to implement the simplified fixed-rate duty drawback scheme with a reasonable eligibility scope.

The results of empirical analyses show that the simplified fixed-rate duty drawbacks has nothing to do with tariff rates. So the lower the tariff on imported raw materials as FTAs increase, the higher the likelihood of excessive refunds.

With regard to the impact of the refund amount on exports, the higher the amount of simplified fixed-rate duty drawbacks, the lower the impact on exports. This is particularly noticeable when the amount of drawbacks is 100 million won or more. This situation suggests an inefficiency possibly caused by the expansion of the scope of SMEs subject to the simplified fixed-rate duty drawback scheme.

Since smaller amounts of simplified fixed-rate duty drawbacks have a stronger positive impact on exports, improvements should be made to the scheme to support companies whose return amount is less than 100 million won. The first step could be including the goods that those companies export under the simplified fixed-rate duty drawback scheme, since export items continually change. On the other hand, with the number of FTAs increasing, it would be necessary to exempt items whose preferential tariff rate is 0% from simplified fixed-rate duty drawbacks to reduce potentially excessive refunds.

Individual drawbacks carry the risk substitution drawbacks. If the Korea-China FTA is entered into effect, it will mean more than half of Korea’s trade will be carried out under FTA agreements. For this reason, it would be difficult to continue allowing substitution drawbacks between domestic and imported raw materials in the long term. However, Korea needs not act preemptively on this issue before it becomes an internationally issue. The same applies to the issue of raw material distribution for domestic consumption and for export. In order to solve these problems, a strict application of the duty drawback system by strengthening substitution drawbacks requirements would be necessary. Also, substitution drawbacks between imported raw materials with wide duty-rate gaps should be restricted to induce the companies to import raw materials by taking advantage of FTAs.

The existence of multiple numbers of tariff rates for a single item is due mainly to FTAs. So making best use of FTAs is not going to cure all problems, which is why the advance duty exemption system should be considered. This system would make it possible to prevent excessive duty

drawbacks by removing tariff rate gaps among imported raw materials used to manufacture export goods. In this way, it would prevent subsidy and trade conflict issues as well.

Since the advance duty exemption system is not implemented in Korea, it would be worth considering the alternative bonded area system as it would have similar effects. For those items that could cause administrative costs or excessive duty drawbacks in the future, it would also be useful to apply a bonded area system and to minimize the application of the duty drawback system.

This study has presented an overview of the duty drawback system operating in Korea for the past decade based on duty drawback data. It has also shown statistical and empirical analyses on duty drawbacks by drawback scheme, industry and business category. Although there are shortcomings in the regression analysis we present here, this study goes beyond previous studies in shedding light on the impact that duty drawbacks have on exports and on the changing amounts of exports. It is our sincere hope that the policy recommendations we have provided will help the duty drawback system in Korea become fairer and more efficient.

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